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Noble Prizes Plan to Mine
Value From Asia's Rubble

By

Henny Sender Staff Reporter of The Wall Street Journal

Updated Feb. 11, 1998 12:01 a.m. ET

HONG KONG -- It is a gloomy winter day and Richard Elman, chairman of trading and shipping company Noble Group Ltd., is scanning the even gloomier news on his computer screen. The rupiah and won have both touched new lows; a Korean air-conditioner maker has just declared bankruptcy. "Air-conditioner firms use a lot of metal," he muses. "Perhaps we ought to buy it. We could get a good price."

Those are big ambitions from a man whose company was one of the first to feel the blast of the region's economic typhoon. Noble's main business as a supplier of iron and steel for infrastructure and construction has ground to a virtual halt as banking systems stop working, customers can't pay for goods and ships lie idle waiting for orders. Profits are plunging and the company's stock has sunk to less than a quarter of its listing price. So why the acquisitive gleam in Mr. Elman's eye?

One word: cash.

Unlike many firms caught in the maelstrom, Noble has no long-term debt. Its listing on the Singapore stock exchange last March raised nearly US$40 million and left it flush with cash. So even though the firm's share price has since collapsed, Noble is spared the high interest rates and sudden Asia risk premium that is the fate of most companies in the region. In fact, Mr. Elman wants to go on a shopping spree. Now, he figures, is the time to look at air-conditioner makers in Korea, steel mills in Thailand, or any other assets that he might be able to buy for a fraction of what they're worth.

Noble's plans illustrate how even companies ravaged by Asia's financial crisis spot opportunity amid the mayhem. Not that those companies will all use the opportunity to their advantage -- but at least Noble has some cash in the bank to give it a go.

Boom-and-Bust Cycle

That doesn't make Noble's immediate prospects any prettier. The company's business depends utterly on the economic health of Asia, where sharply weaker currencies are slowing down factory orders and killing consumer demand. A trader and shipper of steel and other metals, Hong Kong-based Noble owns a link in most parts of the production chain, matching those with raw materials with those who process them.

During Asia's boom times, Noble prospered. Between 1992 and 1995, its profit more than doubled, according to Indosuez W.I. Carr Securities, one of the few brokerage firms that tracks Noble. But just as it rode on the back of Asia's growth, providing the building blocks of the region's infrastructure, so it has been hit fast and hard by the downturn.

The first warning signs popped up a year ago, when Noble's ship-chartering business came under heavy pressure from Korean competitors. The Koreans were bidding for contracts at prices Noble calculated had to be below their costs.

"Suddenly we were losing orders to the Koreans," recalls Harindapal Banga, who is in charge of shipping for Noble. "We realized they were desperate for cash flow to pay off their debts. But we thought it an isolated problem at a few shipping companies," he adds.

It wasn't, and as the full extent of the rot became clear, so too did Noble's exposure to it. Noble had forged a niche for itself acting as supplier and middleman for Chinese steel mills looking for iron ore and Japanese and South Korean mills seeking inputs for stainless steel. Now, it's caught in the middle as credit lines in Korea dry up and Asian demand nosedives. Compounding Noble's woes is a fall in prices of commodities such as iron ore and coal, which is squeezing profit margins.

As a result, Noble is taking a hit. Although it managed to boost revenue by 76% to US$474 million in the first half of 1997, net profit plummeted 81% to US$1.8 million. Richard Stokes, an analyst at Indosuez W.I. Carr, figures Noble's profit for all of 1997 will come in at US$4.1 million, down 80% from 1996. For 1998, he forecasts that profit will improve slightly to US$9.2 million. Noble's shares, which made their debut last year at 88 U.S. cents, are languishing at about 20 U.S. cents.

Widespread Targets

Mr. Elman doesn't see Noble's problems disappearing anytime soon. But nonetheless, he's determined to expand his company by buying stakes in anything to do with Noble's business. Last year, Noble bought the Asian coal business of Phibro, the commodity arm of U.S.-based
Travelers Group
, figuring it could supply a key raw material to the mills from which it buys steel. Noble wants to get into the manufacturing business, too: Mr. Elman is mulling buying stakes in Thai steel mills and Chinese building-material plants. China currently accounts for about half of the group's revenue.

Mr. Elman hopes banks will see a special appeal in his plans. Weighed down by nonperforming loans, many banks are reluctant to foreclose because they would then be stuck with assets they may not be able to use or sell. But Noble could take equity, provide raw materials, take the finished product and market it.

Whether Noble can pull off its grand plans remains to be seen. "We believe the group has the necessary qualities to ride out the current turbulent operating conditions," says Mr. Stokes, the analyst. Ray Hood, a fund manager at State Street Global Advisors, admires Noble for its strong management and its sound balance sheet. But he remains leery of any firm so dependent on the commodities cycle for its profits.

No one is more aware of the turbulence Noble faces than Mr. Elman. Recently, he wrangled with a Korean bank that refused to honor a customer's letter of credit -- just the sort of business glitch that is becoming increasingly common in Asia, as economic problems ripple through the financial system. "They said their customer wasn't going to pay for 180 days and therefore they weren't going to pay," he recalls. Eventually, the bank coughed up the cash, though it took days longer than it should have.